Article by Christie Cannon, CPA
In today’s world we’re faced with challenges at every turn. Still, we’ve overcome a lot in 2020 and have an arsenal of war stories ready to be passed down through our generations. We’ve all needed a few minutes to breathe deeply and exhale – we deserve a pat on the back. But it’s now time to regroup and refocus our energy and efforts on tackling the new set of challenges that exist. For PE-backed companies, also referred to as portfolio companies, these challenges include a range of obstacles that require a next level of energy and enthusiasm to overcome.
Private equity firms and their portfolio companies face organizational changes, competing demands and requirements from their investors, an onslaught of activity in the PE market while also re-focusing their efforts away from cost cutting measures needed to survive in 2020, and into new product creation or new service offerings needed to grow and thrive in 2021.
Organization changes
It’s no surprise the most popular topic in any employee-based forum today is the return-to-work question. Companies of all sizes in every market are facing this new challenge of addressing how to keep their talent happy while meeting the needs of the business. For PE-backed companies, this issue becomes a priority given the limited pool of talented resources in the market and the need to right-size to meet the growing demand. Pre-COVID we began to see growing activity of top talent transitioning into the PE-backed company market. In order to recruit the right people, companies need to restore salaries to pre-COVID levels and identify opportunities to find new talent. The return-to-work question must be answered and the current trend toward a hybrid work environment needs to be vetted. This can be a challenge for smaller and younger companies due to the need to be together to build a productive culture. The businesses that will succeed are those with leaders who understand the need to have proper organization change management processes in place.
Investor requirements
Pre-COVID, a common challenge faced by PE-backed companies was how to juggle the deliverable requirements when multiple investors exist while employee resources were limited. Post 2020 this challenge remains, but at an elevated level. When COVID brought investor uncertainty into the market, demands on their company results increased. Today, companies that survived the covenant violations, common in 2020, not only have to work to improve investor confidence in their business, they also have to meet additional reporting requirements with fewer resources that existed pre-COVID. A typical portfolio company may have 2 to 3 different sources of funding, and each source has their own unique reporting requirements and their own timetable. Implementing processes that can handle competing demands, while not having to ramp up employee resources, is a challenge.
Product or service expansion
Those companies that withstood the storm of 2020 did so by quickly cutting costs. The focus on cost reduction activities is subsiding, and with the uptick in PE investment activity during the first half of 2021, investors are pushing for a higher return on their investment. This requires PE-backed companies to shift their focus from the cost cutting survival mode, to a product creation or service expansion mode. This is not an easy pivot in any economy but even harder in one that still has a level of future uncertainty looming. It is important for these companies to find the right way to balance spending on new product or service development with a cost controlling focus.
Arcus Advisors knows what it takes to not only tackle the challenges facing PE-backed firms, but how to partner in a way that will enable maximum results in an efficient manner. Our slogan is “smart people getting it done”, and in this uncertain, unprecedented time, you need a firm who will focus on bringing in the right people to work alongside you to overcome your challenges. If we’ve learned anything this past year, it is that partnerships and people working together yield the most powerful results. Let us be your partner as you face the most significant challenges that exist in your company today.
